Monday, April 01, 2019

Spoofing or wire fraud? DOJ fires back at industry criticism of charging decision

By Lene Powell, J.D.

In a strongly worded response to recent industry amicus briefs, the Department of Justice defended its decision to charge two defendants with conspiracy to commit wire fraud rather than spoofing for alleged illegal trading in the precious metals markets. According to the DOJ, the wire fraud charges are valid, the amicus briefs suffer from factual and legal distortions, and the groups are motivated by “undisclosed legal, monetary, and reputational interests” (U.S. v. Vorley, March 26, 2019).

“The briefs ignore relevant Seventh Circuit law, misstate controlling law, mischaracterize readily available facts, and assert factual propositions as self-evident even though contrary to the allegations in the Indictment,” the DOJ wrote. “The amici also present themselves as the standard bearers for a statutory scheme that two of them have previously characterized as ill-conceived, unnecessary, and unconstitutional—as part of what is now a nearly decade-long lobbying effort.”

Wire fraud charges. The defendants, James Vorley and Cedric Chanu, worked as traders at Deutsche Bank AG. In January 2018, as part of a joint DOJ-CFTC sweep, the defendants were charged with spoofing and engaging in a manipulative and deceptive scheme by the CFTC, and with conspiracy, wire fraud, commodities fraud, and spoofing offenses by the DOJ. According to the filings, the defendants repeatedly placed orders for COMEX gold, silver, platinum or palladium futures contracts that they wanted to get filled (the “Genuine Order”) and entered orders for the same contract on the opposite side of the market that they intended to cancel before execution (the “Spoof Order”). The CFTC alleged that this sent false signals of increased supply or demand to trick market participants into executing against the genuine orders.

In July 2018, the defendants were indicted for wire fraud affecting a financial institution and related conspiracy.

Industry concerns. In February 2019, amicus briefs were filed by FIA and U.S. Chamber of Commerce, SIFMA, and Bank Policy Institute criticizing the DOJ’s decision to charge the conduct as wire fraud rather than spoofing. The groups argued that the DOJ’s move used a “novel and expansive” theory that threatens to chill legitimate trading that is essential to vibrant, liquid markets. Worse, it potentially could be applied well beyond the commodities markets to any offer to enter into a contract—allowing parties to bring frivolous claims under RICO as well as other civil statutes and common law causes of action that require proof of a misrepresentation.

“Introducing new and unnecessary standards of ‘implied misrepresentations’ that criminalize, or call into question, a market participant’s failure to disclose trading intentions opens the door for arbitrary prosecutions and vexatious private claims,” wrote the FIA.

DOJ response. Point by point, the DOJ resoundingly rejected amici’s arguments and contended that the wire fraud charges were valid. First, the spoof orders constituted false or fraudulent “representations” that satisfied the wire fraud statute. The purpose of placing the fraudulent orders was to inject false and misleading information into the market to create a false impression of increased supply or demand and, in turn, to cause other market participants to buy or sell futures contracts at quantities, prices, and times that they otherwise would not have, said the DOJ.

Next, the DOJ addressed what it characterized as factual inaccuracies by amici.
  • The prosecution was not “novel.” Defendants have been convicted of conspiracy to commit wire fraud based on similar conduct in three different judicial circuits, including two defendants in Northern District of Illinois, and including conduct that pre-dated passage of the anti-spoofing provision.
  • Orders placed on an open market are not immune from criminal scrutiny. The argument that the spoof orders could not be fraudulent because they were executable and subject to market risk was rejected in the Seventh Circuit’s landmark decision in U.S. v. Coscia.
  • The prosecution did not conflate the misrepresentation and intent elements of wire fraud. Ascertaining whether a representation is false may rely on the speaker’s intent, but that is not “conflating” the representation’s falsity with the separate requirement that the speaker have had the intent to defraud.
  • The alleged misrepresentations pertained to an “essential element” of the relevant transactions, namely the value of a commodity, which is influenced by supply and demand. 
The DOJ further countered that amici’s purported policy concerns were unsupported, based on mistaken factual claims, and/or irrelevant. According to the DOJ, the FIA’s concern with the effect on the functioning of the futures markets is dubious, given that there have not been any adverse effects arising from multiple wire fraud convictions to date based on conduct involving spoofing. Further, the groups did not substantiate their concerns with examples in other commercial settings, and concerns about potential civil RICO liability about statute of limitations issues amounted to requests for the Court to disregard the law, said the DOJ.

Finally, the DOJ hinted that the amici are reflexively opposed to prohibitions in this area, noting that the FIA and SIFMA urged Congress to repeal the anti-spoofing statute enacted by Congress. Moreover, some of the amici’s members have “undisclosed legal, monetary, and reputational interests” in the proceedings, the DOJ said.

Other cases. The commodities fraud and manipulation landscape has evolved since enactment of the anti-spoofing statute as part of the Dodd-Frank Act, as cases have worked their way through the system, including the upholding of the U.S. v. Coscia conviction and the acquittal in April 2018 of Andre Flotron, a defendant in the same sweep that ensnared Vorley and Chanu. A variety of factors can affect choice of which statute to enforce and what penalties are imposed, as explored in a PLI seminar last year by Sullivan & Cromwell partners Alexander Willscher and Kathleen McArthur. Whatever the outcome of the Vorley case, it will only add complexity to this already tricky landscape.

The case is No. 18 Cr 35 (JJT).